Car makers bank on Chinese market but. . .

August 18, 2009 15:17 IST

Car manufacturers from Europe bank on the Chinese market -- but the state prefers to support local manufacturers.

The brand-new Porsche just made it to the 97th floor; and only in an upright position. The door of the goods elevator of Shanghai World Financial Centre, the second largest building in the world, barely closed.

At the top of the building, the new Panamara, the four-door Porsche coupe, was presented to the world for the first time. Never before has a vehicle premiere in China been celebrated like this.

Now this is something to get excited about. Not only the new car, but also the Chinese market, the only market in the world that is growing without a scrapping premium.

While other automobile shows struggle with cancellations, the Shanghai Auto Show in April enjoyed the strong presence of the international car manufacturers.

Mercedes presented its lifted S-class with economic hybrid drive, Audi a new generation of the off-road Q7, Rolls-Royce (BMW group) unveiled the name of its latest model -- RR Ghost. Car markets in the US, Europe, Japan and Russia plummeted in double digits recently, during the same period China reported growth rates of 4 per cent, to 2.7 million vehicles.

That means that during the first quarter of 2009 China sold more cars than the US; which has never happened before.

The Volkswagen AG, with about 17 per cent market share in China, sets a new record. The German car manufacturer has never sold as many cars in a month as in March 2009 -- an increase of 9 per cent (6 per cent for the entire first quarter of 2009).

Volkswagen entered the Chinese market early and held a 50 per cent share of the market in China, with its joint venture partners, at the beginning of this decade.

This will change though. Japanese cars have a market share of about 30 per cent, and even Korean manufactures achieved 8 per cent.

But that's not the only pressure Volkswagen and other Western manufacturers are feeling. In 2009, local Chinese companies grabbed a market share of over 30 per cent for the first time - more than the Japanese.

This success is founded on political motives.

The Chinese government makes every effort to prop up local car manufacturers whose smaller, more economic and cheaper cars fare better than their foreign-engineered counterparts (which are usually big and expensive).

A strategic plan published mid-March sets 40 per cent of market share as a target.

The government is pumping $730 million into the interior of China alone, where 64 per cent of the Chinese population lives and where Western companies are underrepresented. Local carmaker Geely announced that it will introduce 32 new models into the market in the next 18 months.

Western engineers tend not to take the clumsy Chinese vehicles seriously. Recently a car made by Brilliance failed the crash test of the German Automobile Association.

"We are making fun of the cars," says Jürgen Kracht, Founder and Director of the Hong Kong-based Management Consultancy Fiducia, which has been specialising in the Chinese market for decades, 'but we should not underestimate them.'

In the future, the global car industry will be changed by Chinese brands such as SAIC, FAW, Dongfeng, Changan and Geely. Of course the Chinese are not about to make this happen overnight.

Currently they are busy conquering the home market for lower middle class cars. They will then penetrate established markets in the neighbouring Asian countries, Russia, South America and Africa, especially where well-thought-of brands have become too expensive.

Only after gaining experience in these countries they will dare look to the Western markets. But in some technologies, such as alternative propulsion, the Chinese are already trying to play a market leader role.

The manufacturer BYD, successful in cell phone batteries, is making progress in the area of electric vehicles. It is this competition that is often underestimated, since there are sentiments that emerging markets would not be able to develop these technologies, says Kracht.

"In my opinion, that's a big mistake." The technologies may not be well-engineered, but the Chinese are able to develop them much faster.

"And the government is quick to create markets to absorb these technologies," notes Kracht.

Fortunately, for some Western carmakers the pressure for premium class car sales is not too big. Take the German example: for years, Audi has been faring well in the Chinese market with its locally produced A6. Mercedes and BMW are also doing well.

But Rupert Stadler, Chair of the Board of Audi, is on the alert. He is continually impressed by the way the Chinese government influences the psyche of the market.

With the recent tax reductions for smaller cars the government managed to improve consumer confidence so that even the buyers of luxury cars left their hesitations behind and resumed purchasing vehicles.

"By doing this, China has indicated to the world that they are capable of responding to crises decisively," says the manager of Audi.

This time it has benefited Western manufacturers -- which may not always be the case. The Chinese government pays close attention to Western carmakers to make sure that they are not overstepping the bounds of their influence. Often Western manufacturers are forced to enter joint ventures with local companies. Stadler says that in China you "always have to negotiate lengthily."

Also, customers in China are not easy to please. They do not stick to one brand; rather prefer trying different ones. "They want to show their wealth," says Stadler.

The Audi manager believes that having been present in China for many years is still to their advantage. Nobody doubts that in the future the Chinese market will be more important for Audi than the German one.

For Porsche, China is already the third most significant market, even the hopes of BMW and Mercedes rest on the rich Chinese consumers. Will the German car makers then have to realign to Chinese liking? "No," believes Stadler.

"The Chinese customers will become like Western customers."

Frank Sieren is based in Beijing. Andreas is a specialist in international relations and development aid